No benefit in net benefit test – by Steven Globerman (National Post – October 25, 2012)

The National Post is Canada’s second largest national paper.

Steven Globerman is the Kaiser professor of international business at Western Washington University and a senior fellow at the Fraser Institute.

Competitive markets beat regulators every time

The recent decision by the federal government to block a proposed takeover of Progress Energy Resources by Petronas, a Malaysian state-owned company, increases the likelihood of a rejection of the pending acquisition of Nexen by CNOOC, a Chinese state-owned oil company.

It also follows the federal government’s action denying the takeover of Potash Corp. by BHP Billiton, a privately owned Australian company. These developments justify reconsideration of whether the net benefit test used by the Canadian government to assess foreign takeovers of Canadian companies makes economic sense.

Since Petronas is a state-owned enterprise (SOE), as is CNOOC, the economic issues raised by their proposed acquisitions are more complicated than in cases when the foreign investor is privately owned, as is BHP. Nevertheless, the basic economic arguments against making government approval of foreign takeovers of Canadian companies conditional on a net benefit test are similar and compelling, regardless of the ownership status of the foreign investor.

The market for corporate assets is global. Hence, would-be acquisitors of Canadian companies compete against other foreign and domestic investors. Global competition in the market for corporate control generally ensures that the price paid for a successful acquisition reflects the long-run expected profitability of the corporate assets acquired when they are used efficiently. Indeed, for private investors, it is the expectation of being able to improve the efficiency and profitability of takeover targets that justifies outbidding other investors for the assets in question.

When capital markets are competitive, the use of a net benefits test is unlikely to enhance the gains realized by Canadians from foreign takeovers of domestic companies. One might argue that the Canadian government can use its review process to leverage implicitly higher prices for domestic assets by “requiring” foreign investors to agree to specific undertakings as a condition of government approval.

For example, a foreign investor might be required to increase domestic head office employment or expand production in Canada to show a net benefit to the Canadian economy. But if competition obliges the foreign investor to pay close to the maximum price it will pay for an acquisition, any effort by the government to elicit such undertakings will merely cause the foreign investor to abandon the takeover.

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